The treaty will limit the number of nuclear warheads to as few as 1,500 warheads each and it cuts the allowable number of missiles capable of delivering the warheads to between 500 and 1,100.
It is designed to replace the START I agreement, which is nearly two decades old and expires on 5 December.
"We resolved to reset US-Russia relations so that we can cooperate more effectively in areas of common interest," Obama said at a joint press conference with Medvedev.
"We have taken important steps forward to increase nuclear security and stop the spread of nuclear weapons. This starts with the introduction of armed nuclear arsenals," he said after their meeting at the ornate Kremlin.
Under the two countries' current treaties, according to a White House statement, the maximum allowable levels of warheads is 2,200, and the maximum allowable level of launch vehicles is 1,600.
The US and Russia will "conduct a joint review of the entire spectrum of means at our disposal that allow us to cooperate on monitoring the development of missile programmes around the world," the two leaders said.
Citing the dangers of ballistic missile proliferation, the two leaders called "upon all countries having a missile potential to refrain from steps that could lead to missile proliferation and undermine regional and global stability."
Obama, who is on his maiden visit to Russia, also concluded an agreement with Medvedev allowing the US to use Russian air space to transport its military supplies to American troops fighting Taliban and the Al-Qaeda in Afghanistan.
In the joint statement, the two leaders said they are concerned about the continuing conflict in Afghanistan and reaffirmed their "commitment to the goals of the common fight against the threats of terrorism, armed extremism, and illegal drug trafficking" in the country.
"We shall continue and develop our cooperation in the interest of enhancing the capabilities of the government of Afghanistan to accomplish key socio-economic objectives, to raise living standards, and to ensure the security of its people," the two presidents said.
They also agreed to jointly work toward accounting for their missing military personnel from World War II, the Korean War, the Vietnam War and the Cold War, including Soviet military personnel unaccounted for in Afghanistan.
Obama and Medvedev concluded a plan for resuming military-to-military cooperation and agreed to create a new commission "to provide better structure to the bilateral relationship" between Russia and the United States.
Obama is accompanied by his wife Michelle and two children -- Malia and Sasha.